How Are Second Mortgages Handled in Consumer Bankruptcy Cases?

 Posted on May 03, 2023 in Bankruptcy

If you are like many people considering bankruptcy, the idea of losing your home is a major concern. While bankruptcy will allow you to eliminate some of your debts, the discharge of your home mortgage will allow the lender to foreclose on your home. You may be able to avoid this in certain situations, but if you also have a second mortgage on your home, you may be wondering how that debt will be treated in a potential bankruptcy case. The good news is that second mortgages can sometimes be eliminated or reduced through bankruptcy, depending on your individual circumstances and the type of bankruptcy you file.

Mortgage Loans in Chapter 7 Vs. Chapter 13 Bankruptcy

In a Chapter 7 bankruptcy, your first and second mortgages may be discharged entirely along with any other debts you owe. However, as mentioned, above, the lender or lenders may then pursue a foreclosure. Because of this, Chapter 7 is usually only an option if you do not plan to stay in your home.

In a Chapter 13 bankruptcy, your debts will be restructured, and you will be required to repay a portion of what is owed over a three-to-five-year period. If you choose not to discharge your mortgage debts, you can use this repayment plan to pay back missed payments and any applicable fees over time. This will allow you to become current on your mortgage loans and avoid the loss of your home.

Lien Stripping

If your home is underwater, meaning that you owe more on the mortgage than the home is actually worth, you may be able to "strip off" a second mortgage during a Chapter 13 bankruptcy. That is, if there is no equity in your home that could be recovered by the second mortgage holder in a foreclosure, the lender will be unable to recover what is owed, and this loan may be discharged once the bankruptcy process is completed.

For example, if your home is valued at $250,000, the balance on your first mortgage is $260,000, and you also have a second mortgage that has a balance of $20,000, there will be no equity in the home that could be put toward the second mortgage. However, if your home is valued at $270,000, you would have $10,000 of equity that could be put toward the second mortgage, so that loan cannot be stripped off.

If lien stripping is available, your second mortgage will no longer be considered a secured debt. During the Chapter 13 bankruptcy process, this loan will be grouped together with other unsecured debts in your repayment plan. Once you complete the repayment plan by making all payments during the three-to-five-year period, your debts will be discharged, and you will no longer be required to make payments toward the second mortgage.

Contact Our Mecklenburg County Chapter 13 Bankruptcy Attorney

Navigating the bankruptcy process can be complex, and as you consider how to address different types of debts and receive a fresh financial start, it is important to work with a professional who has experience in this area. At Blossom Law PLLC, our Concord bankruptcy lawyer can help you understand whether you can use lien stripping for a second mortgage or whether other options may be available to help you address your debts and regain financial stability. We will guide you through the bankruptcy process and make sure you meet all of your legal requirements, ensuring that you can move forward into a better financial future. Contact us at 704-256-7766 to set up a free consultation.

Sources:

https://www.rocketmortgage.com/learn/how-bankruptcy-affects-mortgages

https://homeguides.sfgate.com/can-keep-home-release-second-mortgage-debt-through-bankruptcy-47148.html